When Moodyâs finally joined S&P and Fitch in downgrading the United Statesâ sovereign credit rating, it wasnât a thunderclap. It was the last echo in a long decline. Still, for a nation that had held a pristine AAA since 1917, the move from Moodyâs to Aa1 was not just bureaucraticâit was symbolic. And while investors may not need to panic, the Raymond James Investment Strategy team warns1: the message is clear, the clock is ticking, and Washington has work to do.
Raymond James Chief Investment Officer Larry Adam, alongside Senior Investment Strategists Tracey Manzi and Matt Barry, take investors through the implications of the downgrade in a Q\&A briefing published May 19, 2025. The report is candid in tone, meticulous in reasoning, and resounding in its conclusion: this isnât about rating semanticsâitâs about fiscal discipline, or the lack thereof.
A Downgrade Long in the Making
âMoodyâs decision to strip the US of its AAA rating is historic,â the team writes. âAlthough the downgrade doesnât reflect any new specific developments, it reinforces a message we've emphasized for some time: the US is on an unsustainable fiscal trajectoryâ.
The rationale from Moodyâs breaks into three components:
- Rising National Debt â âFederal debt has more than tripled since 2008ârising from $10 trillion to over $36 trillion today,â the strategists note. Projections show the debt burden climbing from over 120 percent of GDP to 134 percent by 2035, three times higher than the median AAA-rated sovereign.
- Persistent Deficits â The US has run a deficit for decades, averaging about 3 percent of GDP. But in recent years, that number has more than doubled. âIn the aftermath of the COVID-19 recovery, the deficit averaged ~7 percent⌠projected at 6.2 percent in 2025,â the report explains. The real threat is the combination of ârising entitlement spending, escalating interest costs, and a fiscally expansionary budget proposalâ which could push deficits to 9 percent of GDP within ten years.
- A Ballooning Interest Burden â âInterest payments have surged from $375 billion in 2019 to $881 billion at the end of 2024,â the team states. Thatâs now nearly 18 percent of all federal tax revenue. Moodyâs projects this could hit 30 percent by the mid-2030s, creating a scenario where debt service could choke off fiscal flexibility.
No Fire Sale, but a Warning Shot
Despite the downgrade, Raymond James doesnât foresee immediate market upheaval. âWhile symbolically significant, the downgrade is not likely to trigger any forced selling of US debt,â the team emphasizes. Most investment mandates have been amended to include broader categories like âgovernment securitiesâ rather than a strict AAA rating. âMoodyâs downgrade is not likely to move the needleâ from a portfolio construction standpoint.
Historically, downgrades have had mixed market impacts. The 2011 S&P downgrade sent the VIX spiking to 50 and the S&P 500 plunging nearly 7 percent in one day. But in 2023, the Fitch downgradeâthough occurring during a market pullbackâhad a more muted impact on equities. The bond market, however, told a different story, as 10-year Treasury yields surged to nearly 5 percent amid fiscal alarm and a suspended debt ceiling.
What Does This Mean for the Economy?
Raymond James draws a line between capacity and political will. âThe US debt challenge is not about the ability to pay, but the political unwillingness to place the debt on a sustainable path,â the team writes. They do not expect the downgrade to alter the current course of President Trumpâs tax bill, which could add another $4 to $5 trillion to the national deficit. But it does send a clear signal: the policy trajectory is untenable.
On the yield front, the downgrade pushed the 30-year Treasury rate back above 5 percent for the first time since October 2023. âThe bond market has been pricing in the deteriorating fiscal outlook for some time now,â they say. They reiterated their forecast for the 10-year yield to settle around 4.25 percent by year-end, though in the near term, they âdo not rule out the possibility that âbond vigilantesâ could send another shot across the bow to policymakers to get their fiscal house in orderâ.
Caution for Equities
As for stocks, the team remains measuredâbut wary. âWe do not anticipate the downgrade will have a material, long-term fundamental impact on the equity market.â Still, after a roughly 20 percent rally from April lows, they view the market as vulnerable. âWith equity technicals stretched⌠valuations in the 91st percentile relative to historical levels⌠and the 10-year Treasury yield rising above the key 4.50 percent level⌠earnings will need to drive the market higher from hereâ.
With many tariff-related impacts yet to show up in earnings data, they expect S&P 500 estimates to be revised downward from the current $264 consensus to between $250 and $255. âWe maintain our cautious stance on the equity market and urge investors not to become complacentâ.
The Bigger Picture
The final takeaway from Raymond James is clear-eyed and pragmatic. The downgrade is âa psychological and symbolic blowâ to the United Statesâ global financial stature. But itâs not a shock, nor is it a catalyst for immediate economic disruption. Instead, itâs another signpost on a long and worrisome fiscal road. The concern is not about debt sustainability todayâbut about how long Washington can delay a reckoning.
âWhatâs more concerning is the continued lack of political will in Washington to address the deteriorating fiscal outlook,â the team concludes. âThis inaction leaves financial markets vulnerable to bouts of volatility⌠and raises the risk of a bond market disruption akin to the UKâs âLiz Truss momentââ.
In a world already shaped by heightened macro risks, Raymond Jamesâ message is simple: investors donât need to panic, but they shouldnât look away either. The AAA may be goneâbut accountability has just arrived.
Footnote:
1 Larry Adam, Tracey Manzi, Matt Barry. "Q&A with Investment Strategy: The US Loses Its âAAAâ Credit Rating." Raymond James, May 19, 2025
